|FHA has loophole in loans geared for investment property
The FHA is aimed at promoting home ownership for consumers who do not “fit the box” by traditional credit standards – high credit score, big equity, low debt ratio, etc.
The FHA supports the housing market by offering an alternative financing vehicle for homeowners and buyers with little equity. The FHA makes loans on primary homes only, with a few exceptions.
• Exception No. 1: As as long as the property used to be a primary residence and the mortgage is an FHA insured loan, you can still get a new FHA mortgage for that same property. Here is a scenario that will pass the “makes sense test:” the house was purchased and lived in. The same consumer purchased a different primary home, moved into that property and has been renting out the original home ever since relocating.
• Exception No. 2: Property was purchased as a primary home and lived in, the loan on the property is an FHA insured loan, the consumer purchased and moved into a new primary residence and has turned the original home into a second home/vacation property they visit a few times per year.
To meet the rule, property must have been a former primary residence and has a current FHA loan tied to that home. In such a scenario, a consumer can refinance that loan under the FHA Streamline Refinance Program. What consumers should be aware of is that in recent years, FHA has increased their mortgage insurance premiums, which can make a streamline refinance less attractive as the mortgage insurance premiums are higher than in years past.
Current FHA mortgage insurance factors includes up to 1.75 percent of the loan amount amortized over the term of the loan as well as a monthly mortgage insurance factor based on 1.35 percent off the loan amount prior to the upfront mortgage insurance premium being financed.
Here’s an example. Taking a loan amount for $400,000, the financed loan amount becomes $407,000. The total 1.75 percent of $400,000 translates to $7,000, which is then financed over the term of the loan. The monthly mortgage insurance would be a pricey $450 per month before principal and interest, fire insurance or property taxes are even accounted for.
FHA refinance deals sweeten for consumers who took out mortgages prior to May 31, 2009. Here’s an FHA loophole: Even if the property is an investment property or second home that used to be a primary residence, lower FHA premiums apply. The upfront mortgage insurance premium financed over the term of the loan, drops to just .01 percent of the loan amount, and the monthly premium is just .55 percent of the loan amount. These numbers change considerably using our $400,000 example. Upfront fee financed and the term of the loan drops to $4,000 and the monthly drops to $183, indeed attractive for a vacation home or an income property. These numbers also apply even if the home is still your primary residence. Occupancy does not change the terms or amounts of mortgage insurance. Are you trying to purchase another principal residence with an FHA mortgage?
If yes, here are some makes sense paths to explore:
• New property would have to be out of a reasonable commute time from the distance of your current primary home.
• Growing family creates the need for “more house.”
• Departing from a jointly owned property with another party.
Scott Sheldon is a local mortgage lender, with over six years of experience helping people purchase and refinance primary residences, second homes and investment properties. Visit him at www.sonomacountymortgages.com.